South Stream victim of Crimea annexation

The South Stream pipeline project, which carries Russian gas to Europe, bypassing Ukraine, may be “dead”, following the EU summit in which leaders decided that the Union should increase its energy independence from Russia.

The Italian oil major ENI, one of the key shareholders in South Stream, has second thoughts about the project, while the Russian tycoon presented as the winner of the tender to build the Bulgarian stretch of the pipeline, appears on the US blacklist adopted in response to Russia’s annexation of Crimea.

The US sanctions block Gennady Timchenko’s assets, and should prevent his firm from carrying out any transactions on EU territory, blocking the pipeline’s construction.

According to Reuters, Timchenko’s company, Stroystransgaz, has been chosen to build the Bulgarian part of the South Stream pipeline. Timchenko’s name does not appear on the EU’s own blacklist of persons, whose assets were frozen by European leaders on Friday.

The Russian businessman is reported to have a 63% share in Stroytransgaz.

The total cost for the construction of South Stream is estimated at €17 billion, while the pricetag for the Bulgarian sections is €3.5 billion.

Tender caught by surprise by US list?

Bulgaria’s energy minister, Dragomir Stoynev, however denied reports that Stroytransgaz had been awarded the tender. The Bulgarian daily Standart quoted him on Saturday as saying that he did not know who the winner would be.

The tender’s winner should have been announced on Friday, but the announcement was postponed until the following, week without explanation. Eleven companies had submitted bids for the tender.

The construction of the pipeline near the Bulgarian city of Varna, where the onshore section starts on EU soil, is expected to begin in June. Gazprom’s CEO, Alexey Miller, has said that the first gas to be carried by South Stream would reach Europe in December 2015.

The Bulgarian minority government, in which the socialists are the leading partner, still has hope for South Stream. The main opposition force, the centre-right GERB party of former prime minister Boyko Borisov, was one of the project’s promoters when he was in power.

But even before the US and EU sanctions were announced, Paolo Scaroni, the CEO of Italian energy company ENI, which is a key shareholder in South Stream, called the future of the pipeline “somewhat gloomy”. Besides Gazprom and ENI, the other shareholders are France’s EDF and Germany’s Wintershall.

Scaroni said the Ukraine crisis could threaten the complex permitting process for the project. “It will put into question the many authorisations that European countries must give to complete the project,” Scaroni said, Reuters reported on Thursday.

Earlier this month, Gazprom said Italy’s Saipem had secured deals worth €2 billion to build the first stage of the offshore section of the pipeline.

But on Friday, European Council President Herman Van Rompuy announced that EU leaders had decided to reduce energy dependency, “especially with Russia”, by reducing energy demand, diversifying supply routes and expanding “indigeneous” energy sources, particularly renewables. He did not mention opposition to any new Russian energy project, such as South Stream.

However, as EU Energy Commissioner Günther Oettinger recently indicated, following the Crimea crisis, Brussels is no longer interested in mediating the legal imbroglio between the six EU countries participating in the South Stream project and Serbia, an EU candidate country (see background).

Between a rock and a hard place

Without EU backing, the six countries face the choice of carrying on with the South Stream project, and face procedures of infringement of EU law, or being sued by Russia for nor delivering on signed contracts.

One of the messages from the summit has been that facing Gazprom, individual EU countries stand no chance of obtaining any long-term advantage, as Gazprom, Russia’s gas export monopoly, which is majority-owned by the state, uses them as pawns in a “divide-and-rule” strategy with the Union.

The EU summit last Friday also gave its blessing to a €11-billon package over the next couple of years, to save Kyiv from bankruptcy, conveying the message that it would do its utmost for Ukraine to become a successful democracy.

If South Stream was to become reality, Russian gas flows would profit others. In 2012, 84 billion of cubic meters (bcm/y) of gas went through Ukraine. South Stream’s capacity is 64 bcm/y, meaning that most of the €2 billion yearly Ukrainian income from Russian transit taxes would be lost if the pipeline was built.

EU sources told EURACTIV that South Stream was “certainly not a project where one would safely invest”, while EU sources quoted by The Daily Telegraph, said the project was “dead”.

Background

South Stream is a Russian project for a natural gas pipeline. As planned, the pipeline would run under the Black Sea to Bulgaria, and continue through Serbia, with two branches to Bosnia and Herzegovina and to Croatia. From Serbia the pipelines crosses Hungary and Slovenia before reaching Italy [see map]. Its planned capacity is 63 billion cubic metres per year (bcm/y).

The key partner for Russia's Gazprom in the South Stream project is Italy's largest energy company, ENI.

Can the European Union justify doing business with a hostile country? If no, then the European Union has no business buying any petroleum products from Russia. The buck stops here. The European Union either stand for its values or it is giving lip-service. Which is it? Action speaks louder than words. The World and Russia awaits.